Latin America's Meltdown Is The Mother Of Invention
For Panamerican Beverages Inc., Latin America's largest Coca-Cola bottler, time was short. With $360 million in debt due in December and January, the Mexican company had seen interest rates on emerging-market securities and bank loans climb above 10%. Deciding against an expensive bond issue, Panamco turned to a funding source it had never needed before: Coca-Cola Financial Corp. Coke responded with a three-year credit of $200 million, and Panamco was able to roll over the rest of the debt. "We paid off the banks, and they reduced their Latin exposure," says Paulo Sacchi, Panamco's chief financial officer. "The strategy worked out best for everybody."
From Mexico to Chile, Latin American companies are having to find new ways to raise cash. Spooked by the Asian and Russian meltdowns, bond investors are fleeing the region, and global banks are running for cover. Big rollovers and new syndications can't be entirely replaced, of course, but in the current climate, they cost dearly. And with slow growth or recession now forecast for the Latin economies, the vise on local corporations is unlikely to slacken anytime soon.
As a result, cash-strapped companies across the region are tapping new financing sources. And they are coming up with techniques they never would have imagined when money was easier. Some companies are turning to local investors with novel convertible-debt offerings. Others are looking for minority shareholders, securitizing receivables such as customer borrowing, and putting their dollar-denominated revenues in hock. No companies are immune, it seems--neither blue chips such as Panamco, nor the region's many well-run, competitive exporters with professional management and transparent finances. "These are first-tier companies with magnificent strategic franchises," says Morris W. Offit, chairman of Offitbank, a New York investment management bank that runs a $140 million emerging-market debt fund. "They are certainly very creditworthy."
There's no arguing with that. Take Petroleos Mexicanos, an established borrower on global markets. With falling oil prices threatening its ambitious investment program, the state-owned oil company last December sold $1.5 billion in bonds backed by Pemex' contracts with U.S. refiners that buy Mexican crude. The offering attracted a broad range of investors, who liked the fact that Pemex customers paid their bills to an offshore company that services the debt. Pemex even insured $900 million of the bonds with MBIA Inc. and Ambac Assurance Corp., specialized insurance companies, giving them a triple-A investment rating.
DOING DOUBLE DUTY. Simpler strategies can be just as effective. Local investors, who know companies and their products well, are another promising source of finance for companies long accustomed to looking abroad. For instance, Gener, a Chilean power company that is expanding throughout South America, needed to roll over debt and finance new projects late last year. Instead of an international bond issue or a bank syndication, Gener's management decided to go for a $500 million convertible bond offering. Local investors, led by private pension funds, snapped up $415 million of it--making it a record debt placement in the Chilean capital market.
Such deals can do double duty by providing debt instruments while developing nascent financial markets. Mexico privatized its pension system a year and a half ago--creating a pool of investors. When Grupo Elektra, a $900 million Mexican appliance and electronics retailer, securitized its consumer loans, the funds proved an important new source of capital that provided $100 million. "If there's a good deal, there's a market for it," says Elektra CFO Luis Echarte.
Even smaller companies are banking on local markets to raise cash through well-designed new instruments. This month, Angel Estrada & Co., an $85 million Argentine manufacturer of school stationery and textbooks, is selling $10 million of securitized receivables to finance the credit it grants stores stocking up for the southern hemisphere's back-to-school sales. "Before, we used bank credits," says Roberto Brigante, Estrada's finance manager. "But this protects me against any uncertainties in the country."
Foreign investors haven't completely deserted the region, of course. But increasingly they are looking for equity stakes. Indeed, private equity funds are likely to acquire a higher profile in the region simply because they can afford to take a longer-term view. Last August, Mexican conglomerate Desc sold 18% of its two retail food companies for $50 million to J.P. Morgan Capital Corp., a J.P. Morgan & Co. investment fund. The deal enabled Desc to secure a cash infusion to buy new food brands just as the Russian crisis panicked the markets. "It's one source of financing that is still available," says Tim Purcell, head of Morgan Capital for Latin America. "This is the type of deal you should expect to see a lot more of, especially in Mexico and Brazil."
GUIDEPOSTS. But private equity funds can't begin to pick up the slack for some of Brazil's big debtors. Brazilian companies have some $26 billion in foreign debt falling due this year. Atop the list: utilities such as Light Servicos de Eletricidade, Rio de Janeiro's electricity distributor, which has an $875 million bridge loan that matures in April. The company is negotiating a rollover with several banks, but it will certainly have to pay a lot more than the 9% it is paying now.
Thanks to the hard-won experience garnered by Mexican companies after the 1994 peso crash, Brazilian and other Latin companies have some guideposts. Back then, Mexican exporters used their sales abroad to back bond issues. Brazilian exporters may need to do the same in a quite aggressive fashion in coming months.
When emerging-market worries eventually subside, Latin companies will find themselves all the stronger. The days of easy money may return, but chief financial officers--with more options to choose from--will be a lot more careful about how they use it.